With Brexit being the leading creator of uncertainty, especially for European businesses, the undefined current geopolitical situation is heavily influencing international business. Even though some may argue that the impact of Brexit on China will be limited, Brexit and its following agreements will create political and economic opportunities and threats that will not stay unrecognised. The ambiguity on currency fluctuation, trade tariffs and consumer behaviour create an uncertainty that is likely to affect companies’ financial transactions and buying decisions on a large scale. This is especially likely in fast paced industries like retail, with the supply chain functions often being closely linked to the Chinese and Far East markets.
Many different political and economic scenarios can be discussed based on Brexit. The debate on trade tariff outcomes is a good example to show how difficult it is to predict what future agreements will look like. However, it will certainly create a lot of room for potential collaboration between China and the UK. The ‘One Belt One Road’ initiative introduced by Xi Jinping is only one example of upcoming global partnership and investment opportunities.
An uncertain future
Until these agreements are in place, uncertainty remains and businesses need to create plans to mitigate risks. Companies already started to take action, after the observation of increasing supply chain and procurement costs. On the one hand, Barclays Bank reports that UK retailers start shifting their sourcing and even entire supply chain operations out of the EU. EU companies are acting the same way by moving their operations out of the UK. This creates an opportunity for Chinses businesses to win a piece of the cake from both parties by providing an alternative sourcing solution.
However, China is currently struggling to find their USP in the international retail environment since it is not a cheap labor country anymore. The CBX Retail sourcing report shows that China’s position remains flat in the global competitive index, especially due to a massive increase in wages ( 7% – 40% within the past 12 months depending on the region). Not only the increasing costs in China as a sourcing destination prevent businesses to shift their entire supply chain, but also the fact it is an expensive and complex operational process. In addition, current currency fluctuations might heavily influence businesses and retailers, who will recognise the pressure on their margins by an increased cost base.
Understanding the changing markets
Companies must develop strategies to circumvent this increase. Converting the costs back to customers might damage their market position and cost reduction initiatives to absorb the increase are complex and need a lot of commitment. Managers cannot wait and observe the situation to become more certain, but must understand their market and business environment to benefit from the current situation with innovative solutions.
JD is a notable example of a company which not only understood the local market trends in China, like high interest in foreign products and quality but also managed to combine them with the impact of geopolitical events. They created “Brexit sales”, where products from the UK have been marketed and sold in a very clever and effective way.
Understanding your market helps businesses to mitigate risks in times of high uncertainty. The current geopolitical events make decision making more and more complex and entities need to rely on local market knowledge and experience. Even though the direct impact on China is proposed not to be major, UK and Chinese businesses should be prepared to see upcoming opportunities and mitigate potential risks as effectively as possible.